Travelcraft Company manufactures a complete line of fiberglass suitcases and attaché cases. The firm has three manufacturing departments: Molding Component and Assembly. There are also two service departments: Power and Maintenance.
The sides of the cases arc manufactured in the Molding Department. The frames, hinges and locks are manufactured in the Component Department. The cases are completed in the Assembly Department. Varying amounts of materials time, and effort arc required for each of the caste The Power Department and Maintenance Department provide services to the three manufacturing departments.
Travelcraft has always used a plant wide overhead rate. Direct-labor hours are used to assign overhead to products. The predetermined over head rate is calculated by dividing the company’s total estimated overhead by the total estimated direct-labor hour, to be worked in the three manufacturing departments.
Karen Mason director of cost management has recommended that Travelcraft use departmental over head rates. The planned operating costs and expected levels of activity for the coming year have been developed by Mason and are presented by department in the following schedules. (All number are in thousands).
| Service Departments | |
| Power | Maintenances |
Department activity measures: | ||
Maximum capacity | 1,000 kilowatt-hours | Adjustable |
Estimate usage for the coming year | 800 kilowatt-hours | 125 hours |
Department costs: | ||
Materials and supplies | $5,000 | $1,500 |
Fixed overhead | 12,000 | 250 |
Total service | $18,400 | $4,000 |
;
| Manufacturing Departments | ||
| Molding | Component | Assembly |
Department activity measures: | |||
Direct-labor hours | 500 | 2,000 | 1,500 |
Machine hours | 875 | 125 | -0- |
Department costs: | |||
Direct materials | $12,400 | $30,000 | $1,250 |
Direct labor | 3,500 | 20,000 | 12,000 |
Variable overhead | 3,500 | 10,000 | 16,500 |
Fixed overhead | 17,500 | 6,200 | 6,100 |
Total department costs | $36,900 | $66,200 | $35,850 |
Use of service departments: | |||
Maintenance: | |||
Estimated usage in labor hours | 90 | 25 | 10 |
Power (in kilowatt-hours); | |||
Estimated usage for the coming year | 360 | 320 | 120 |
Maximum allotted capacity | 500 | 350 | 150 |
Required:
1 Calculate the plant wide overhead rate fur Travelcraft Company for the coming year using the same method a, used in the past.
2. Karen Mason has been asked to develop departmental overhead rates for comparison with the plant wide rare. The following steps are to be followed in developing the departmental rates.
a. The Maintenance Department costs should he allocated to the three manufacturing departments using the direct method.
b. The Power Department cost should be allocated to the three manufacturing departments using the dual method combined with the direct method. Fixed costs are to be allocated according to maximum allotted capacity and variable costs are to be allocated according to planned usage for the coming year.
c. Calculate departmental overhead rates for the three manufacturing departments using a machine-hour cost driver for the Molding Department and a direct-labor-hour cost driver for the component and Assembly departments.
3. As Karen Mason’s assistant, draft a memo for her to send to Travelcraft’s president recommending whether the company should use a plant wide rate or departmental rates to assign overhead to products.
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